Analyst: 'Unloved' Oil & Gas E&P is 'Premier Permian Growth Story'

A Raymond James report made the case for revising its rating on this energy company.

Oil rig and money

In an Oct. 22 research note, analyst Pavel Molchanov reported that Raymond James upgraded its rating on Occidental Petroleum Corp. (OXY:NYSE) to Strong Buy from Outperform to reflect the oil and gas company's "unwarranted" stock underperformance against the backdrop of higher oil price forecasts.

Year to date, "unloved" Occidental is down 2%, whereas the oil and gas exploration and development sector overall is up 8%. "This underperformance has widened the dividend yield to 4.3% while erasing the stock's traditional valuation premium," Molchanov highlighted.

The analyst pointed out the market most recently reacted negatively to Occidental's opting to leave the Qatar ISND concession when it expires in October 2019, but that was an overreaction. "If the company had decided to re-up, this would have involved a long lead time field redevelopment with increased upfront capital spending that would have wiped out much of ISND's current free cash flow," he explained. "Thus, by exiting instead of re-upping, the company is following a capital disciplined approach."

Also at play in the Occidental story are oil prices, and Raymond James expects them to be higher next year, Molchanov relayed. For 2019, the financial services firm increased its projected West Texas Intermediate (WTI) and Brent oil prices to $77.50 and $90, respectively. Raymond James estimates a peak price in 2020 of $92.50 WTI and $100 Brent and a long-term average price of $75 WTI and $80 Brent.

These higher prices would affect Occidental's 2019 peak cash flow yield by 8%, as opposed to 6%, noted Molchanov. The company would have about $2 billion available for share buyback, which Raymond James sees as upside.

Also worth noting, Molchanov wrote, is strong production growth in the Permian Basin. "We forecast Permian liquids growth of 17% in 2019, driving all-in companywide growth of 8%." Further, the current midstream bottlenecks in the Permian do not impact Occidental, because "ironclad access guarantees are in place for its Permian barrels well into the next decade."

Raymond James has a $90 per share target price on Occidental, whose stock is currently trading at about $68.23 per share.

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e&pNYSERaymond JamesPermianPermian BasinUnited StatesUSAonshoreOccidental Petroleum

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